As Canadians approach retirement, one of their primary concerns is how to ensure their savings and government benefits will provide a comfortable lifestyle throughout their golden years. For those fortunate enough to have a $1,000,000 investment portfolio and who qualify for maximum Old Age Security (OAS) and Canada Pension Plan (CPP) benefits, it’s crucial to understand how these financial resources can sustain their retirement.
Government Benefits: OAS and CPP
In Canada, retirees can expect to receive OAS and CPP benefits. As of 2024, the maximum monthly OAS benefit is approximately $720/month ($8,600/year). The maximum CPP benefit, taken at age 65, is approximately $1,365/month ($16,400 /year). A retired couple both receiving maximum CPP and OAS benefits can expect approximately $50,000/year.
Investment Portfolio: $1,000,000 in Retirement
A $1,000,000 investment portfolio provides significant financial leverage in retirement. The income generated from this portfolio can vary widely depending on the asset allocation and investment strategy. Assuming a balanced portfolio with a moderate risk approach, retirees might expect an annual return of around 6% – 7%, before taxes. This translates to an annual income of roughly $60,000 – $70,000.
We typically recommend a 4% – 5% withdrawal rate from your portfolio to complement your other income sources. This would ensure that you do not encroach on your investment capital.
Total Income and Spending Power
When combining OAS and CPP benefits with portfolio income, the total annual income would be approximately $90,000 – $100,000, before tax. Assuming the couple can split their income, you can expect a 20% marginal tax rate or 14% average tax rate. On $100,000 of gross income, you can expect to have approximately $85,000 net income to fund your lifestyle.
Is $85,000/year, after-tax sufficient? Consider the following:
- Inflation: The cost of living increases over time. An annual budget that is comfortable today might need adjustment in the future.
- Healthcare Costs: While Canada’s healthcare system provides many services, retirees should anticipate out-of-pocket expenses for additional healthcare needs, including prescriptions and dental care.
- Lifestyle Choices: Spending patterns vary widely. Travel, hobbies, and other leisure activities can significantly impact how much you can afford to spend.
- Taxes: Investment income is subject to taxation. Depending on the type of investments and other sources of income, taxes could affect net spending power.
- Longevity: Planning for a longer retirement means ensuring the portfolio can last through potentially 30 years or more. Regular reviews and adjustments to spending habits may be necessary.
Have more questions? Reach out to your TMFG advisor to discuss.
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Carlo Cansino
Senior Financial Advisor
Assante Capital Management Ltd.
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
